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Appeal of "Needs to Improve" CRA Rating - (First Quarter 2000)


A community bank appealed its Community Reinvestment Act (CRA) rating of "needs to improve" assigned by the supervisory office. The PE (PE) stated that the bank's lending performance was in need of improvement, and that the loan-to-deposit (LTD) ratio was les than reasonable, given the bank's size, financial condition, capacity to lend, and assessment area credit needs. It also stated that the public was not aware of the loan products offered by the bank, bank management had a reputation for conservative lending practices, and the community perception was that submitting a loan application would be futile.

The appeal focused on the LTD ratio component of the CRA evaluation process. The bank believed the LTD ratio was reasonable given the demographics, economic factors, and limited lending opportunities in the area.


The CRA regulation performance standards' criteria for evaluating a small bank's record of helping to meet the credit needs of its community include an evaluation of the bank's LTD ratio adjusted for seasonal variations and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments, the reasonableness of the ratio is assessed considering the performance context in which the bank operates including its size, financial condition, and assessment area credit needs. This ratio is one indicator of a bank's ability and willingness to help meet the assessment area's credit needs.

The OCC recognizes that every bank is unique in its own right and evaluates each bank's CRA performance based on the context in which it operates. In reviewing the bank's performance in their assessment area, the ombudsman considered the following factors:

  • The bank's LTD ratio during the examination was 32 percent with an average of 26 percent since the last examination, two years ago. The bank's deposit base included a significantly high level of deposit accounts from public funds, insider relationships, and other large depositors. Depositors with certificate-of-deposit balances of $28,000,000 have only $2,600,000 in loans outstanding. It is also important to note that of the $20,000,000 in demand deposit accounts, $9.5MM or 89 accounts have balances over $50,000, with an average deposit balance of $106,000. These large depositors contributed to the bank's relatively low LTD ratio.
  • The community is heavily banked, with one financial institution for every 800 residents.
  • The largest sector of the assessment area is upper-income families; however, in general, the population is declining. In addition, there are no low- and moderate income census tracts in the assessment area.
  • When considering the number of financial institutions in the assessment area and the significant level of lending to low- and moderate-income borrowers, additional lending opportunities to this segment of the population is limited.


The performance context under which this bank operates is unique. It includes:

  • A high level of deposit accounts from public funds, insider relationships, and other large depositors with low level of loan demand;
  • The community is heavily banked with one financial institution for every 800 residents;
  • A high level of upper-income individuals within the assessment area;
  • A declining population;
  • No low- and moderate-income census tracts;

Therefore, considering the above factors the ombudsman opined that the bank's loan-to-deposit ratio was reasonable. In determining the appropriate overall CRA rating, the ombudsman also considered the following:

  • The bank's loan distribution reflected a very good penetration among borrowers of different income levels. The bank's loan composition level of 32 percent to low and 27 percent to moderate income borrowers exceeded the assessment area's composition percentages of 17 percent and 21 percent, respectively.
  • The sample of commercial and agricultural loans reviewed indicated that a substantial majority was extended to entities with annual gross revenues of less than $1 million per year.

Based on the bank's performance context and the small bank performance criteria, the bank's performance under the Community Reinvestment Act was found to be more reflective of a "satisfactory" rating. In accordance with the regulation, the bank is helping to meet the credit needs of the communities in which it operates. A revised PE reflecting this change was forwarded to the bank from the supervisory office.

Appeal of "Satisfactory" CRA Rating-Lending and Service Tests -(First Quarter 2000)


A large interstate bank filed a formal appeal concerning its Community Reinvestment Act (CRA) composite rating of "satisfactory record of meeting community credit needs"

(Satisfactory). Specifically, the bank appealed its lending test and service test ratings in one multi-state MSA and one state rating. The bank requested:

  • Rating upgrades for the lending test and service test and the overall rating in the multi-state MSA and one state, which the bank believed would lead to a composite rating of outstanding;
  • Inclusion of additional data in the investment test analysis that inadvertently had not been provided to examiners during the CRA examination. Subsequently, the bank requested an expansion of the ombudsman's review to include a re-evaluation of the investment test for the multi-state MSA, one state rating, and the overall rating; and
  • Exclusion of a merged institution's data from the review of the bank's CRA performance due to its recent acquisition. Additionally, the bank asked that the examination scope be amended to include more full-scope reviews of bank assessment areas within the state.

The bank offered four rationales to support its appeal for upgraded ratings. First, it felt that the selection of areas for a full-scope evaluation unfairly skewed the results of the examination, due to the recent merger and the additional assessment areas created. It also felt that more assessment areas within the one state should have received a full-scope review to provide a more balanced picture of the bank's performance in the state. Second, the bank stated that it had an even higher level of performance in the lending and service areas of community development than it had in the prior period when it was rated outstanding. Third, the bank felt its performance compared favorably to another large bank that had been rated outstanding during the same time period. Lastly, the bank provided additional investments made during the period that were inadvertently not provided to the examiners during the exam.

The bank's composite rating and ratings for the one state and multi-state MSA, in question, were based on the examiner's assignment of the following individual test ratings:


Lending Test

In evaluating a bank's lending performance, the OCC considers a bank's:

Performance Tests and Composite Ratings

Rating Area Lending Test Investment Test Service Test Composite
Bank High Satisfactory Low Satisfactory Low Satisfactory Satisfactory
State High Satisfactory Low Satisfactory Low Satisfactory Satisfactory
Multi-state MSA High Satisfactory High Satisfactory High Satisfactory Satisfactory

Number and amount of home mortgage, small business, small farm and consumer loans, if applicable, in the bank's assessment area(s);

  • Geographic distribution of home mortgage, small business, small farm and consumer loans, if applicable, within and throughout its assessment area(s), and within low- and moderate-income geographies located in its assessment area(s);
  • Distribution of home mortgage, small business, small farm and consumer loans, if applicable, by borrower income level and small businesses and farms of different sizes;
  • Community Development lending, including the number and amount of loans, their complexity and innovativeness; and
  • Use of innovative or flexible lending practices to address credit needs of low- and moderate-income individuals or geographies.

The ombudsman's analysis of bank and examination prepared work papers and the CRA Performance Evaluation (PE) identified that the bank:

  1. Did not provide its consumer loans for review as part of the lending test evaluation.
  2. Home mortgage and small business lending levels, in terms of number or dollars had increased since the prior evaluation. However, when the lending volume was compared to demographic data, including the percent of owner-occupied housing units by geography, percent of low- and moderate-income families within the bank's assessment areas, and the number and location of small businesses, the bank's performance was determined to be similar to the prior period.
  3. Home mortgage and small business lending performance was mixed throughout the state. In one significant assessment area, the bank demonstrated excellent lending performance. However, performance in the remaining state assessment areas, which represent more of the bank's deposits than the above-mentioned assessment area, was generally adequate to poor.
  4. Community development lending within the state was adequate. However, half of the dollar volume of these loans was concentrated within one assessment area.
  5. Several flexible home mortgage-lending products had been developed specifically for low- and moderate-income borrowers.
  6. Overall home mortgage, small business, and community development lending in the multi-state MSA was considered excellent.

Additionally, the ombudsman concluded that the descriptions of lending performance in the CRA PE were not consistent when describing similar performance among the various rating areas. Consequently, the PE provided a confusing picture of the bank's actual performance.

Investment Test

In evaluating a bank's investment performance, the OCC considers the:

  • Dollar amount of qualified investments;
  • Innovativeness or complexity of the qualified investments;
  • Responsiveness of the qualified investments to credit and community development needs; and,
  • Degree to which the qualified investments are not routinely provided by private investors.

The ombudsman's analysis of bank and examination prepared work papers and the CRA PE identified that:

  1. Several of the investments the bank provided with its appeal were "qualified investments" and were added to the investment totals.
  2. The examiners evaluated the bank's performance using the funded value of the bank's qualified investments rather than the book value. Using the book value increased the total investment dollars in the state and multi-state MSA.
  3. The increase in both dollar and number of qualified investments had a positive impact on the investment test rating in the state and bank overall.
  4. The qualified investments were responsive to community credit and development needs, but generally did not evidence innovation or complexity and were routinely provided by other private investors.

Service Test

In evaluating a bank's service performance, the OCC considers the:

  • Distribution of bank branches among low-, moderate-, middle-, and upper-income geographies.
  • Record of opening and closing bank branches, particularly in low- and moderate-income geographies or primarily serving low- and moderate-income individuals;
  • Availability and effectiveness of the bank's delivery systems for providing traditional and non-traditional retail banking services in low- and moderate-income geographies and to low- and moderate-income individuals;
  • Range of services provided in low-, moderate-, middle-, and upper-income geographies and the degree to which the services are tailored to meet the needs of those geographies; and;
  • Extent to which the bank provides community development services and innovative and responsive they are to assessment area needs.

The ombudsman's analysis of bank and examination prepared work papers and the CRA PE identified that:

  1. Generally, the bank's branch and ATM distribution was commensurate with the percentage of households living within the state assessment areas and the multi-state MSA.
  2. The bank had a net increase in branches in low-income geographies within the multi-state MSA.
  3. Generally, the bank's branch and ATM network was accessible to all portions of the bank's assessment areas.
  4. The bank's provision of community development services was significant in the multi-state MSA and adequate overall within the state.
  5. A number of community development services provided within the multi-state MSA were not included in the PE.
  6. Community contacts and government officials, in the multi-state MSA, indicated that the bank was a community leader and strongly influenced community development, especially in economically depressed areas.

Examination Scope

The ombudsman agreed with the bank that the merged institution's data should not have been included in the evaluation of the bank's performance. Additionally, the examiners should have performed a full-scope review of more state assessment areas to better ascertain the bank's performance. However, the ombudsman concluded that altering the examination scope would not change the bank's state or composite rating.

Comparison of Performance with Other Institutions

The bank provided comparisons of its lending and investment data with that of another large bank. Comparing one bank's raw data to another bank's, without an appropriate context is difficult and does not necessarily result in being able to conclude that performance is similar or dissimilar. In the ombudsman's review, this bank's lending data was compared to nine other large banks examined during the same time period. The conclusion was that this bank's lending data was not inconsistent with other large banks that received a high satisfactory under the lending test.


Based on the above findings and others contained within the PE, the ombudsman concluded that some of the individual test ratings for the multi-state MSA, the state, and the bank overall should be upgraded.

Additionally, it was concluded that the merged institution's data should remain in the PE. The decision to leave the data in the evaluation was based on the bank having an assessment area in the applicable state prior to the merger. Accordingly, performance in the state would have to be rated and the inclusion of the merged institution's data did not negatively impact the bank's composite CRA rating.

Changing the examination scope in the state, in question, may have helped develop a better context in which to assess the bank's performance and provided more support for the rating assigned. However, analysis of this additional data would not change the state and composite ratings.

The revised ratings are reflected in the following table.

Performance Tests and Composite Ratings*

Rating Area Lending Test Investment Test Service Test Overall Rating
Bank High Satisfactory High Satisfactory High Satisfactory Satisfactory
State High Satisfactory High Satisfactory High Satisfactory Satisfactory
Multi-state MSA Outstanding High Satisfactory Outstanding Outstanding

*Ratings in bold italic were upgraded.